Estee Lauder 2011 Annual Report Download - page 101

THE EST{E LAUDER COMPANIES INC. 99
and share in our distribution channels. We are also con-
tinuing to re-energize certain of our brands through the
introduction of products that feature advances in research
and technology and focused marketing campaigns. At the
same time, we are investing in initiatives to incubate and
develop next generation products and brands, as well as
continuing our overall success in driving turnaround
brands toward sustainable profitability levels. We are con-
tinuing to build our regional organizations and leveraging
them to increase effectiveness and efficiencies while
utilizing strategic partnerships, alliances and licensing to
build scale in research and development, distribution and
third-party manufacturing.
At this time, we do not believe the recent economic
uncertainty and financial market volatility taking place in
the United States and certain European countries will have
a significant impact on our business. This is due in part to
our belief that we are better positioned as a result of our
strategy to manage our business effectively and efficiently
and we will allocate resources appropriately. However, if
the degree of uncertainty or volatility worsens or is pro-
longed, then there will likely be a negative effect on ongo-
ing consumer confidence, demand and spending and as
a result, our business. Currently, we believe general eco-
nomic and other uncertainties still exist in select markets
in which we do business such as in Japan, North America
and certain countries in Europe. We continue to monitor
global economic uncertainties and other risks that may
affect our business. The disasters that occurred in Japan
during the fiscal year did not have a significant impact on
our business or our consolidated financial results for fiscal
2011. At this time, we believe the ongoing consequences
may continue for the short term, however, we cannot pre-
dict with certainty the magnitude or duration of the
impact and we will continue to monitor the situation.
Looking ahead to fiscal 2012, we plan to continue
building on our strengths. We have a strong, diverse and
highly valuable brand portfolio with global reach and
potential, as well as a track record of outstanding creativ-
ity, innovation, entrepreneurship and healthy growth. We
believe our “High-Touch” service model has potential
beyond department stores, and believe we have a pas-
sionate, highly-talented workforce to help us achieve our
long-term strategy. Our balance sheet, cash flows and
gross margin are strong, however, we continue to operate
in a challenging environment. While net sales and operat-
ing results improved dramatically from fiscal 2010, we do
not expect the same levels of year-over-year improve-
ments to continue. We have a number of areas to
improve, including further enhancements to our cost
structure, sharing operational best practices internally,
increasing traffic to where our products are sold, and fur-
ther diversification of distribution channels. We also plan
on continuing to allocate our spending to the significant
modernization of our global information systems, which
includes our Strategic Modernization Initiative as well as
other initiatives, and shift our focus from gift with
purchase activities to advertising, merchandising and
sampling initiatives. We expect these strategies will help
improve our cost of sales margin but will increase our
operating expense margin over the next fiscal year.
RETURNS AND CHARGES ASSOCIATED WITH
RESTRUCTURING ACTIVITIES
In an effort to drive down costs and achieve synergies
within our organization, in February 2009, we announced
the implementation of a multi-faceted cost savings pro-
gram (the “Program”) to position the Company to achieve
long-term profitable growth. We anticipate the Program
will result in related restructuring and other special
charges, inclusive of cumulative charges recorded to date
and through the remainder of the Program, totaling
between $350 million and $450 million before taxes.
While we will continue to seek cost savings opportunities,
our current plans are to identify and approve specific
initiatives under the Program through fiscal 2012 and
execute those initiatives through fiscal 2013. The total
amount of charges (pre-tax) associated with the Program
recorded, plus other initiatives approved through June 30,
2011, is approximately $303 million to $308 million, of
which approximately $198.5 million to $200 million
relates to restructuring charges, approximately $50 million
of other costs to implement the initiatives, approximately
$38.5 million to $42 million in sales returns and approxi-
mately $16 million in inventory write-offs. The restructuring
charges are comprised of approximately $151.5 million to
$153 million of employee-related costs, approximately
$27 million of other exit costs and contract terminations
(substantially all of which have resulted in or will result in
cash expenditures), and approximately $20 million in non-
cash asset write-offs. The total amount of cumulative
charges (pre-tax) associated with the Program recorded
from inception through June 30, 2011 was $239.4 million.
We expect that the implementation of this Program,
combined with other on-going cost savings efforts,
will result in savings of approximately $675 million to
$725 million (program inception through the end of
fiscal 2011 is approximately $560 million) including
the reduction of certain costs relative to an assumed nor-
malized spending pattern. Our long-range forecast for
operating margin reflects these anticipated savings, net of
strategic reinvestments.